ABC is a small firm operating in the retail sector. The firm has shown phenomenal growth in the recent past due to economic stability, less competition and increasing buying power of customers. The current growth of the firm has led to a struggle between different departments for grabbing maximum resources to ensure continuous growth of their respective departments. The departmental heads are claiming that departmental objectives are more important and resources should be allocated according to departmental objectives rather firm objectives. This viewpoint conflicts with the management believe that “resource allocation should be based on overall objectives of the firm”. The inter-departmental conflict starts shadowing the growth prospects of the organization and requires immediate action.

Discussion

Being a student of strategic management, you are required to support one of the above-discussed positions (firm based allocation VS department based allocation). Support your answer with solid arguments.

ABC is a small firm operating in the retail sector. The firm has shown phenomenal growth in the recent past due to economic stability, less competition and increasing buying power of customers. The current growth of the firm has led to a struggle between different departments for grabbing maximum resources to ensure continuous growth of their respective departments. The departmental heads are claiming that departmental objectives are more important and resources should be allocated according to departmental objectives rather firm objectives. This viewpoint conflicts with the management believe that “resource allocation should be based on overall objectives of the firm”. The inter-departmental conflict starts shadowing the growth prospects of the organization and requires immediate action.

Discussion

Being a student of strategic management, you are required to support one of the above-discussed positions (firm based allocation VS department based allocation). Support your answer with solid arguments.

Answer

This work develops a profit maximizing cost allocation scheme for firms that allocate all costs to their various outputs and then use these costs to set prices, a process known as fully-distributed cost-based pricing. If the costs incurred by the firm are not easily traced to a particular output (for example, the electric bill for a shared manufacturing plant), the costs must be allocated. The demand for a given output is assumed to be a function of the price. Hence, the cost allocation scheme that is selected will affect both the price and the demand for the output. The allocation of common costs that maximizes the firm's overall profit under these conditions is identified. Frequently, the profit maximizing allocation allocates none of the untraceable common costs to one or more of the outputs. This allocation scheme stands in contrast to common practices of sharing costs equally or proportionally across outputs. Examples explore the implications of such a profit maximizing cost allocation on prices and demand in four scenarios: i) no constraints, ii) constraints on maximum allowable prices, iii) a change in market size, and iv) cost containment incentives.The costs of service departments are allocated to the operating departments because they exist to support the operating departments. Examples of service departments are maintenance, administration, cafeterias, laundries, and receiving. Service departments aid multiple production departments at the same time, and accountants must allocate and account for all of these costs. It is crucial that these service department costs be allocated to the operating departments so that the costs of conducting business in the operating departments are clearly and accurately reflected. The second method of allocating service department costs is the step method. This method allocates service costs to the operating departments and other service departments in a sequential process. The sequence of allocation generally starts with the service department that has incurred the greatest costs. After this department’s costs have been allocated, the service department with the next

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